Walker & Ors v Secretary of State for Trade & Industry

This is an appeal by all three Respondents against Orders made by Mr Registrar Baister on 31 May 2002 pursuant to Section 6 of the Company Directors Disqualification Act 1986 (“CDA”) following a fully contested trial leading to the following:-

A1 (David Walker) disqualified for two and a half years.

A2 (Matthew John Pennifold) disqualified for three years.

A3 (Corrina Diana Walker) disqualified for two years.

The Respondent (The Secretary of State for Trade and Industry) sought the Order for disqualification based on two grounds of unfitness namely:-

The A’s caused or allowed Pineland Facilities Management Ltd (“Pineland”) to trade whilst insolvent to the detriment of creditors from at least 22 September 1998 (“the first ground”); and

The A’s caused or allowed Pineland to enter into a transaction to the detriment of creditors (“the second ground”).

At trial the Registrar was satisfied that there was unfitness on the first ground in relation to the period between 15 December 1998 and 29 December 1998 but he dismissed the alleged unfitness based on ground two. The A’s contend that the Registrar was wrong in his conclusion on the first ground.

The Respondent by cross appeal seeks to appeal by Respondent’s Notice dated 11 July 2002 on the basis that the Registrar should also have made a finding of unfitness on the second ground.

Under paragraph 17.18 of the Practice Direction Insolvency Proceedings, which applies to Disqualification Appeals by virtue of paragraph 2(4) of the Insolvent Companies (Disqualification of Unfit Directors) proceedings rules 1987 as amended this is a true appeal in the sense that an appeal under CPR 52 to the Court of Appeal would be. I accept the submission on behalf of the Respondent that primary findings of fact should not be disturbed on Appeal, particularly where the Court below has heard oral evidence but that the Appellate Court is in a position to form a Judgment as to fitness based on those factual findings and if its conclusion differs from the trial Judge it must say so see; Hitco 2000 Ltd. [1995] BCC 161.

As I set out further in this Judgement, it is plain that the Registrar considered the matter very carefully and very fairly as regards the Respondents and clearly came to very carefully considered Judgments. I am not in a position to interfere with any of his factual findings and neither party suggested that there was any basis for me so doing.

The Judgment is comprehensive as to the background and apart from the crucial matters to which I shall make reference expressly; I do not propose to set out in full the detailed and comprehensive review of the background by the learned Registrar.

Pineland was incorporated on 2 February 1994 and carried on business as a printer. It was the holding company for a group of companies known as the Pineland Print Group. It went into administrative receivership on 29 December 1998 and creditors’ voluntary liquidation on 7 July 1999. A1 was chief executive and majority shareholder, A2 was finance director and A3 (who is A1’s daughter) was administration director and financial controller.

The deficiency was £1.3M (One point Three Million Pounds) rising to £1.5M (One point Five Million Pounds).

I shall also refer to another company in the group specifically, Pineland MU Ltd (“MU”). It was not part of the group. It was a freestanding company formed specifically to deal with work from Middlesex University with which it had a seven-year contract. It was not of the group because the University insisted in dealing with an independent company. It operated no account of its own but banked via Pineland.

MU’s position is significant in the respect of allegation (2) and the Respondent’s cross appeal.

Pineland traded successfully until about January 1998 when it lost a major contract with Abbey National. Steps were taken to obtain new work and limit the damage. In May 1998 Pineland was approached by Guilbert Niceday UK Ltd. (an existing client and major print company) (“Guilbert”) who wished to form a strategic alliance. The Registrar found that it would have been perceived as a salvation and there was no doubt that the prospect of this alliance was very real it being hoped (legitimately) that in fact the level of business would be as much as £4M (Four Million Pounds) per year.

Although Guilbert did provide work to Pineland no formal written agreement was entered into. There was an expectation that there would be a formal arrangement, but this did not materialise and for unknown reasons Guilbert withdrew on 22 September 1998. This is a critical date as the Registrar found. Pineland could not survive after Guilbert withdrew. Some negotiations took place afterwards but to no avail. Pineland continued to work for Guilbert, but in October it was dealt a further blow when the payment period by Guilbert was lengthened from seven days to 45 days.

It seems to me, that the Registrar was right to conclude that up until the 22 September 1998 the A’s had legitimate expectations as regards Guilbert, but thereafter knew nothing was going to happen. He found that they acted responsibly and in good faith in relation to the Guilbert deal. They kept their Leeds premises going on for laudable reasons and kept the bank informed of what was going on.

On 22 October 1998 the board comprised of the A’s plus a Mr Dufton and a Mr Johnson in attendance considered matters. There was a board minute, which was prepared by Mr Pennifold and which was apparently the subject of a great deal of forensic analysis and requiring some comment.

From the oral evidence the Registrar concluded that most board meetings took place informally. He concluded that the minutes of the meeting were strange; they had an air of artificiality. He was sure that some or all of the events recorded were discussed or touched on in some other way and that the board clearly did reach a resolution to take professional advice. It struck him that they were drafted with an additional purpose namely to show the board in the best possible light and to gloss over one particular transaction which had actually taken place before the meeting (the subject matter of allegation number 2) and before Guilbert had given Pineland the bad news that it was not going ahead with the strategic partnership.

This echoes more strong criticism of the evidence of the A’s. He found for example A1 to be a reliable and truthful witness, although there were areas where he must have been confused or mistaken. He had reservations about the evidence of Mr Pennifold and Miss Walker. Much of their evidence he said did not stand the test of cross-examination and was not borne out on close scrutiny. Much was a post hoch construction put on events; “spin” was the word used by Counsel for the Secretary of State a word, which in his view was apt and accurate. It followed that where their evidence differed on contemporaneous documents or was not borne out by independent corroboration he would be reluctant in many instances to take them at their word.

Despite that criticism the Registrar quite properly accepted their evidence on occasions and merely (this is in relation to allegation (2)) rejected their justification in strong terms he nevertheless, dismissed the allegation despite his criticism of their evidence.

After the board meeting of 21 October 1998 the Registrar found that the board acted swiftly and had a meeting with the Insolvency Practitioners on 23 October 1998 who advised a Company Voluntary Arrangement (“CVA”). The bank was supportive. Pineland ceased to trade on or about 29 October 1998 and MU took over so that Pineland would not incur further credit.

The Registrar found that by the end of September and by the beginning of October 1998 Pineland was insolvent. It needed £2M (Two Million Pounds) per annum to keep the Leeds factory afloat. He also found that the A’s knew or ought to have known about this at that time and that Pineland continued to trade thereafter in particular by selling of equipment in the period between 15 and 29 December 1998 to which I shall make more reference in this Judgment.

The CVA proposal was formulated and the Registrar described it as being a lengthy and detailed document sensible and well thought out and further that it was a credit to the Defendants and their legal advisors.

The meeting of creditors took place on 15 December 1998. At 5.00 pm on the day before, the Inland Revenue sent in their proxy indicating they wished to reject the proposal. This appeared to be a policy decision rather than one which had anything to do with the viability of the proposal. The meeting was then adjourned to 29 December 1998.

The Registrar found that the adjournment was to enable the board to consider whether anything could be done to save the proposal, but that they must have been in no doubt that the A’s all realised that Pineland was doomed.

The day after the adjourned meeting for the CVA A1 and A3 met with a Mr Pickard who was later appointed one of the Administrative Receivers. On 23/24 December A2 told the IP that the CVA was to be withdrawn. The Administrative Receivers were appointed on 29 December the paper work having been in place by 24 December. The receivership resulted in sufficient assets to secure discharge of Pinelands liabilities to the Bank.

The meeting with the proposed administrative receivers is to my mind significant.

Between 15 December and 29 December 1998 there was, as the Registrar found, a sudden flurry of activity. Ten items of equipment were sold for a total of £276,756.25 (Two Hundred and Seventy-six Thousand, Seven Hundred and Fifty-six Pounds and Twenty-five Pence) (the VAT element being £42,831.25 (Forty-two Thousand, Eight Hundred and Thirty-one Pounds and Twenty –five Pence)). In addition on 20 December 1998 an Order was placed with Pineland by a company called BPR Graphic Engineers (Yorkshire) Ltd. for a Heidelberg five colour convertible press for £335,000.00 (Three Hundred and Thirty-five Thousand Pounds). Confirmation of the order was dated the same day and the invoice was dated 21 December 1998. The total purchase price given is £393,625.00 (Three Hundred and Ninety-three Thousand, Six Hundred and Twenty-five Pounds) (including VAT of £58,625 (Fifty-eight Thousand, Six Hundred and Twenty-five Pounds)).

The Registrar found these sales were completed with astonishing speed. He also found however, that the prices obtained were the best prices that could be obtained. He rejected the A’s evidence to the effect that this was done with the approval of the IP. He also rejected their evidence that they did the sales “at the behest of the Bank”. He also rejected the submission on behalf of the A’s that the disposal of the machinery was not trading. I agree with that analysis.

Mr Pennifold accepted in cross examination that the effect of the sales was to give rise to a substantial VAT liability, one which the A’s must have known could not be paid.

None of the proceeds were received before the receivership commenced; all the proceeds were collected by the Administrative Receivers who accounted them to the Bank as book debts subject to a fixed charge. The result of that was that the Bank became entitled to receive the VAT without being under an obligation to account for it to the Customs and Excise. It is clear that if the sale had taken place by the receivers or a liquidator then the VAT would have to have been paid to the Customs and Excise. That appears from the decision of In Re John Willment (Ashford) Ltd. [1980] 1 WLR 73.

In the evidence before the Registrar was a note prepared by Mr Pickard in early January 1999. The note discussed a number of matters including the first meeting with the A’s on 16 December and the second meeting on 23 December 1998.

At the first meeting there was an analysis of Mr Walker. The note says that the at first meeting Mr Pickard “advised Mr Walker of the difference between the fixed and floating charge under insolvency conditions. In spite of putting a CVA proposal together for PFML and having another company in liquidation this was new to him. When I first met Mr Walker he had not entirely put aside the CVA idea although he recognised the chances of getting it through the meeting were receding. He really wanted to explore alternatives particularly receivership which his solicitor advised him as being more appropriate under the current circumstances.

There is then another note in respect of the second meeting which says this:-

The Registrar found that there was no such intention and further found that Mr Walker, in conducting the sale, did not have regard to the fact that he had guaranteed Pineland’s debt to the Bank.

It may well be that Mr Pickard was not appraised accurately as to the A’s belief as to the prospects of saving the CVA on the 16 December. To my mind that makes no difference. He was being consulted about a prospective administrative receivership. In the course of that discussion he was told that sales were taking place. Although Mr Green of Counsel, who appears for the Respondent, submitted that Mr Pickard knew that that was under the umbrella of prospective CVA that is in truth not a genuine umbrella. A prospective CVA affords no protection against sales, which turn out to be wrong. The sale, even if under the umbrella of a CVA, would have the same disadvantageous consequences as the sales that were actually effected. There is therefore nothing in that point to my mind.

At paragraph 47 of his Judgment the Registrar dealt with Mr Pickard’s note. He said that there was no evidence that the proposed administrative receivers advised about the assets sales. He further concluded that the fact that the sales were mentioned in their note is some way from establishing that it was specific advice that was in favour of disposal in the manner actually adopted. He also found, from what he had been told of the treatment of VAT, commonsense would seem to indicate that if Mr Pickard had been asked he would have advised against a pre receivership sale. However, (and significantly to my mind) he concluded:-

He concluded that the A’s did not receive and did not seek any independent advice on disposal of assets and on the continuation to trade after 15 December 1998 and that led him to a conclusion that the first allegation was proven as regards that period and those disposals.

There is no doubt that the Customs and Excise have suffered a detriment in the sense that because of the manner of the sale VAT was received by Pineland and not accounted to them. As it was paid under the fixed charge by having been converted from a floating charge over the assets to a fixed charge over the book debts, they have no priority as against the Bank. As there are no surpluses beyond the sums due to the Bank they cannot take preferentially above the other creditors of Pineland. Even if they did the result might be to defer unsecured creditors even further at their expense.

None of this would have happened had the sales taken place under the umbrella of an administrative receivership or liquidation. As I have said he found the A’s took no advice on these sales.

Thus Mr Green’s submits with force that the consequence was that the A’s incurred a liability at a time when they knew the company was insolvent and that it could not therefore itself discharge that liability.

However, to my mind that is not sufficient. The Registrar found that the A’s could not be expected to know the intricacies of the Willment decision. They obtained the best price for the goods. Whilst I accept the Registrar’s finding that they were trading for those purposes it seems to me that they were acting in the bona fide interests of Pineland and its creditors. They had no means of knowing that the treatment of VAT will be dealt differently if the sales proceeded in the administrative receivership or liquidation. Further, they had a meeting with Mr Pickard. They told him what was happening and he did not demur. The Registrar might have been correct that no express formal advice was given but to my mind that was not the end of the matter. When they saw him it seems to me obvious that if he believed there was anything wrong with the sales he ought to have said something. He did not.

As Mrs Giret QC, who appears for the A’s submitted to me, they would be entitled to believe that as they were not going to receive the money the recipients namely the Administrative Receivers and/or the Liquidator would account for the VAT upon receipt in the normal way.

There is no other adverse suggestion made against the A’s as to their motive for these transactions.

It seems to me, that the Registrar ought not to have drawn the conclusion that he did in relation to finding 1. It is clear the A’s acted responsibly for two and a half months before when they were aware of Pineland becoming insolvent. It is clear that when the CVA could not succeed they immediately sought advice from prospective administrative receivers. They told him what they were doing and he did not comment adversely. They achieved sales, which were quick and were apparently against a deteriorating market and certainly obtained the best price. They were not motivated from their own interests in respect of guarantees and there was no evidence to show that they were motivated to benefit the Bank.

No other explanation for their conduct has been produced.

Further, it seems to me Mrs Giret QC is quite right to pray in aid the conduct of the A’s in relation to the onset of insolvency in the earlier period. There they behaved quite properly. It seems to me that that would militate against them behaving in an improper way in this short period.

The object of a CDDA is to protect from the public from those who abuse the privilege of trading with the benefit of limited liability. In addition to the insolvency requirement (not in issue) A’s conduct must be “as a director of a company that makes him unfit to be concerned in a management of a company”.

The question is not whether or not the director’s conduct deserves criticism. It is the more precise question of whether his conduct makes him unfit to be concerned in the management of a company (re Cubelock Ltd. [2001] BCC 523 at 550 paragraph 124 per Park J).

Where as in this case the allegation is solely based on incompetence the burden is on the Secretary of State to satisfy the Court that the conduct complained of demonstrates incompetence of a high degree and the burden is a heavy one. The reason being for that is the serious nature of a Disqualification Order, see; Jonathan Parker J (as he then was) in Barings Plc No. 5 [1999] 1 BCLC 433 at 483 – 484 approved by the CA in Barings.

This is also to be found in the decision of Lawrence Collins J in re Bradcrown Ltd [2001] 1 BCLC 547 at paragraph 10.

The purpose of this high test of course is to avoid applying issues of hindsight against businessmen who make decisions often under circumstances of great pressure. It seems to me, that with respect to the Registrar, the actions of the A’s during the period 15 December to 29 December, whilst they can be criticised for not seeking advice are not of such a high standard of incompetence as to lead to a conclusion that they are unfit to be involved in the management of a company. It is very easy to submit that they should have specifically asked advice as to the transactions but when one looks at the overall pattern of their conduct form 22 September 1998 they do not to my mind appear to have the badge of grossly incompetent directors. There was nothing in their mind, as far as I can see to suggest that there was any basis for them thinking that the VAT would not be accounted for even though they were forced to admit in cross examination that the company would not be in a position to pay it itself. It seems to me in addition to those matters they’re entitled to assume that if the transaction of selling was wrong, that Mr Pickard might have altered them to it on 16 December. It seems to me, that I am entitled to draw a different conclusion with respect to the Registrar, to the note from that which the Registrar takes in paragraph 47 of his Judgment.

Therefore, although I accept the observations in the Court of Appeal in Goldberg –v- Secretary of State [2001] EWCA 1237 paragraph (30) that a Court should be slow to disturb conclusions of the tribunal at first instance it dose seem to me that this part of the Registrar’s careful Judgment falls within the “mismatch” identified in re Grayan Building Services Ltd. [1995] Ch 241 at 257E.

Accordingly, I would allow the appeal by the A’s in respect of allegation (1).

Mr Green in the course of his submissions suggested that the A’s in the period between 15 to 29 December went behind the various insolvency practitioners’ backs when effecting the sales. He thus implied that they were deliberately avoiding seeking answers to questions in respect of those transactions. I asked him to show me where the Registrar had made such a finding and he was unable to do so. Had he done so, the allegations against the Respondents would not have been limited to gross negligence it would have been also based on some improper conduct. I do not accept there is any basis for Mr Green’s submission. Merely because they did not ask does not mean that they deliberately chose not to ask. It seems to me impossible to criticise them for not asking about the VAT position in respect of the sales when the Registrar (quite properly) found that as laymen they would not be expected to know about it.

The second allegation is that A’s allowed Pineland to enter into a transaction to the detriment of the creditors. It should be noted that the allegation is not, as the Registrar found (paragraph 50 of his Judgment), an allegation of preference. The transaction in question is summarised in paragraphs 50 and following of the Judgment of the Registrar. The bank account at Pineland was as I have said above used by MU and inter company trading took place between it and Pineland. The amount of the inter company trading was shown in a document headed “Audit Trail by Nominal Account”. As at 31 August 1998 that showed a credit sum in favour of MU in the sum of £244,430.19 (Two Hundred and Forty-four Thousand, Four Hundred and Thirty Pounds and Nineteen Pence). The most significant movement shown in the document is that on 30 September 1998 which purports to show an inter company transaction of £172,510.20 (One Hundred and Seventy-two Thousand, Five Hundred and Ten Pounds and Twenty Pence). That relates to the transfer of a Sheridan 562 Saddle Stitcher and an ECRM 45 image setter and processor from Pineland to MU. In addition to that series of entries, there was an invoice dated 15 September 1998 rendered by Pineland to MU for the same amount.

Finally, item 12 of the board meeting of 21 October 1998 records the sale of the items to MU for £150,000.00 (One Hundred and Fifty Thousand Pounds). If the board minute is correct in that it is purporting to record documents in a chronological order it appears that transaction is recorded in the board minutes as occurring after the crucial date of 22 September 1998.

The evidence of the A’s was primarily paragraph 95 of Mr Pennifold’s affidavit. The Registrar dealt with this in paragraphs 53 and 71 of his Judgment. He found that suggestions by Mr Pennifold in that paragraph, that cash was paid for the machinery was “highly misleading”. He also found that the suggestion that the monies were held upon “trust” for MU was a construction put on matters after the event by his advisers for trying to put the best possible gloss on the clients case. He also found that the board minute was misleading implying as it does that the sale followed the Guilbert debacle which was clearly not so. Now I am not quite sure what that part of the Judgment means because if it followed the Guilbert debacle it would be an improper transaction because they knew form the 22 September 1998 that Pineland could no longer survive. In paragraph 58 of his Judgment the Registrar said this:-

That latter point, to my mind demonstrates the falsity of assuming merely because evidence is disbelieved it means no other conclusion can be drawn favourable to the people who are telling untruths.

In effect, the Registrar came to a conclusion that he was unable to decide on which side of the 15 September 1998 the transaction took place. If it took place before that date it would be perfectly proper and MU would have an accrued right off in respect of the substantial indebtedness due to it. As I have said above, there is no allegation of preference here. If the transaction took place afterwards when the A’s knew of insolvency, then of course it would be clearly challengeable because a substantial asset had been transferred to MU which had used its setoff rights to avoid having paid for them. Thus with the onset of insolvency it has achieved the acquisition of a valuable asset when otherwise it would presumably have had to prove as an unsecured creditor.

The conclusion the Registrar came to, was one to my mind that he could properly come to and I see no grounds for departing from that conclusion. This is one of those cases where the Registrar has decided, “not proven” see; Rhesa Shipping Co. -v- Edmonds [1985] 1 WLR 948 H.L.

Mr Green submitted that if the Appeal was allowed and the A’s got away with it in the sense that they not withstanding the insolvency entered into a transaction without advice it would enable unscrupulous directors to try this as well. “Flood gates” arguments are never terribly impressive. I doubt very much whether wrong doing directors are going to be scouring the law reports to find decisions on an individual basis which might suggest a way of behaving wrongly. In any event, to allow the Appeal would not give them such comfort. The Appeal is allowed because the conclusion that I have drawn is that the conduct of the A’s was not such conduct as to render them unfit to be concerned in the management of a company. That is a factual conclusion on the facts of this case looking at the totality of the position and no more. Any director who would seek to draw comfort from it, as Mr Green might suggest, would be speedily disappointed.

Accordingly, there are no grounds to my mind for criticising the Registrar’s Judgment in respect of allegation (2) and I would dismiss the cross appeal.